Living Costs or Legacy? Kenyan Fuel Tax a Dilemma for Leader

(Bloomberg) -- Kenyan President Uhuru Kenyatta faces a hard decision with a new fuel tax: approve it and boost living costs, or rescind it and risk undermining infrastructure plans that are key to his legacy.

Introduced on Sept. 1 against parliament’s wishes and in the absence of Kenyatta assenting to a bill that proposes postponing it for two years, the 16 percent levy has already provoked public outrage. Fuel traders went on strike, public-transport workers blockaded key roads and motorists rushed to fill up at gas stations across the East African nation.

The new tax could bring in 71 billion shillings ($705 million) a year -- a sum the region’s biggest economy badly needs to shore up faltering revenue collection and fund projects ranging from expanding a high-speed railway to building a new highway from the capital, Nairobi, to the coast. Kenyatta also has his so-called Big Four agenda, a program to boost agriculture, manufacturing, health care and home construction he touted after winning a second and final term in last year’s election.

“The president has a difficult decision because the Big Four agenda, which is his agenda, needs to be funded from somewhere,” said Jibran Qureishi, regional economist for Stanbic Holdings Ltd. in Nairobi. If there’s no solution, “it will be shelved and pushed forward, which means no Big Four and no legacy.”

Inflation Warning

Stanbic warned this week the levy could drive inflation to 7.5 percent in October, from 4 percent in August, with prices of goods expected to increase for a minimum of six months.

The fuel tax came into effect after Kenyan lawmakers failed to factor in enough time to vote on extending an existing exemption from the levy until 2020 and have it included in proposed legislation known as the Finance Bill. The tax was first legislated in 2013, but its introduction was postponed until 2016 and then again delayed until this year.

A High Court in western Kenya suspended the tax on Thursday, pending the Sept. 12 hearing of a challenge to its legality brought by a youth group. The energy regulator hadn’t adjusted prices by Friday evening, saying it hadn’t yet been served with the court order.

Another element of the Finance Bill that Kenyatta will have to consider is whether to back lawmakers’ proposals to maintain a two-year-old law that caps the rate banks charge borrowers. The measure exacerbated a slowdown in credit growth, with banks including KCB Group Ltd. citing their inability to compensate for riskier customers by charging higher rates for the slump.

Economic Damage

The International Monetary Fund has said the ceiling is damaging Kenya’s economy and insisted it be scrapped in return for new funding. Kenya’s access to a $1.5 billion standby loan expires on Sept. 14

If Kenyatta does as lawmakers wish by exempting fuel from tax and retaining the rate cap, it would be seen as “a complete failure by the presidency,” according to Jacques Nel, an economist at South Africa-based NKC African Economics. The potential loss of the IMF facility has made investors jittery and forswearing the extra revenue would be a further knock for the nation’s finances, he said.

While repealing the rate cap would please Treasury Secretary Henry Rotich, making fuel exempt from tax again is a step he’s less likely to welcome.

Revenue collection is lagging, with Kenya netting 99 billion shillings in July, but spending 121 billion for recurrent expenditure and debt payments. While that’s the first month of the financial year, before tax measures take effect, if those kind of figures were projected for the rest of the year that would mean 1.2 trillion shillings in revenue -- 600 billion less than planned.

Record Spending

The government, which regularly doesn’t meet revenue targets, plans to spend a record 2.5 trillion shillings in the 2018-19 fiscal year.

One option for Kenyatta, Nel said, is to strike a deal with parliament by extending the tax exemption but making “some amendments” to the interest-rate controls and asking them to back a so-called Robin Hood tax on larger money transfers.

“I think the removal/amendment of interest-rate controls is more important for the IMF than the fuel VAT, so this could again open the door for a follow-up support program,” Nel said. Lawmakers have said it’s too soon to repeal the law and Kenya’s banks remain as profitable as they were before the ceiling was introduced.

“I don’t think Rotich will back down on the fuel tax because he has pressure for revenue,” said Kenneth Minjire, head of securities at Genghis Capital, a Nairobi-based investment bank.

The Robin Hood tax could partly fill the gap. Parliament has previously rejected the Treasury’s proposal that money transfers exceeding 500,000 shillings be taxed at 0.05 percent, with the funds going toward the government’s universal health-care plans.

Once Kenyatta receives the Finance Bill, he’ll have 14 days to either approve it or return it to parliament for revisions.

©2018 Bloomberg L.P.